Friday, August 17, 2007

Common sense index funds

The message of The Little Book of Common Sense Investing, by John Bogle is simple: Buy index funds and you'll do better than most investors. Yet the book counts 214 pages. Each chapter almost reads like a FAQ (frequently asked question). When it comes to investing, at the end, it all comes down to a single number: how much is left over.

"It may not be as exciting, but owning the classic stock market fund is the ultimate strategy. It holds the mathematical certainty that marks it as the gold standard in investing, for try as they might, the alchemists of active management cannot turn that own lead, copper or iron into gold. Just avoid complexity, rely on simplicity, take costs out of the equation, and trust the arithmetic."
"Remember, O stranger, arithmetic is the first of the sciences and the mother of safety." (Louis D. Brandeis, 1914)
"The two greatest enemies of the equity investor are expenses and emotions"
The lessons in the book are clear:

rule 1: Own businesses; don't speculate on emotions
  • Total investment returns - the gains made by businesses - were remarkably steady: 8 - 13% each year and averaging 9.5%.
  • The speculative return has added just 0.1% to the annual investment return.
rule 2: Own all businesses (best risk reducing strategy)
Don't look for the needle. Buy the hay stack.
  • Only 3 out of 355 equity funds (since 1970), or 8/10 of 1%, have survived and mounted a record of sustained excellent.
  • During the 39 year period (1968 to 2006) the S&P500 index fell into the bottom quartile of large cap core funds, in only 2 years and has not done so since 1979. The index has outpaced the average fund in 26 of the 35 years, including 11 of the past years.
rule 3: gross market return - costs = net return for the investor. Costs matter: compounding costs will eat your lunch and dinner
The "all-in" cost of equity fund ownership can come to as much as 3-3.5%/year. This includes the expense ratio, sale charges and initial sale charge. Compounding over 50 years, the investor who puts up 100% of the capital and assumes 100% of the risk, earned only 31% of the market return.
For 1980 - 2005:
  • S&P returned 12.5%/yr; $10,000 will grow to $170,800 before inflation (3.3%/yr); after inflation: $76,200.
  • Average Fund returned 10%/yr; $10,000 will grow to $98,200 before inflation (3.3%/yr); after inflation: $40,600
  • The impact of compounding costs over 25 years is a difference of 53%!
rule 4: gross market - costs - market timing and selection penalties = net return earned by mutual fund investors
There is a investment time lag which costs investors dearly. When you calculate it out, the $10,000K investment will grow to:
  • S&P invested: $76,200 (after inflation)
  • Average Fund: $16,700 (after inflation)
  • The impact of costs, counter productive market timing and selection penalties over 25 years is enormous: 22%! of what could have been if invested in an index fund.
rule 5: taxes are costs too. High turn over = taxes
Continuing the calculation:
  • S&P invested: 12.3% return - 0.6% (tax cost) - 3.3% (inflation) = 8.4%; $10,000 grows to $65,000.
  • Average fund: 10.0% return - 1.8% (tax cost) - 3.3% (inflation) = 4.9%; $10,000 grows to $23,100
  • Again the impact is substantial when compounded over many years.
So, this brings us to a simple summary: Bogle recommendations
  1. Serious money account = 95%
    Funny money account = 5%
  2. Invest serious money account 100% in index funds
    1. <>
    2. 85% S&P index
    3. 5% small cap index
    4. 10% value index
    5. short term bond fund
    6. inflation linked bonds
  3. Invest funny money (experiment)
    1. some in stock
    2. some in mutual funds
    3. commodity funds
    4. Avoid other funancial constructs
  4. Asset allocation: bond % == your age or (age -10) %

Monday, February 19, 2007

A new automobile

After we sold our old poppy orange 1965 Ford Mustang a few years ago, we were managing with just one car: a 1998 Honda Civic EX, which we purchased second hand. It has been a great and reliable car.

Pumpkin - my poppy orange 1965 Ford Mustang
We recently decided to buy a second car. It would make our commute easier and allow us to spend more time with the kids. One of us would drop them of at school, whereas the other could pick them up at an earlier time. So, the kids wouldn't have to spend so much time at school. We made the following list of criteria.

I love the unsexy station wagon as you get the space of an SUV without the bigger fuel bill. And a station wagon does drive more like a regular sedan. Some new SUV-station wagon cross-over models (i.e. Ford Edge, Chrysler Pacifica) looked promising, but none had the reliability or fuel efficiency we were looking for.

Decent fuel economy was important. We looked at the hybrids, but they are very pricey, even considering California State tax incentives and a donation from work to drive a hybrid.

Reliability was key. We used Consumer Reports as the deciding factor. Many American brands and models were quickly excluded. Also the Volkswagen Passat Wagon was no match because of its poor reliability.

Leather, satellite radio, a navigation system were not a high priority. We were ok with the basic luxury model.

A short list of models we liked included (in order of preference):
  1. Volvo V70
  2. Subaru Legacy Wagon
  3. Subaru Outback
  4. Subaru Forrester
  5. Honda Odyssey
  6. Toyota Sienna
  7. Volvo V50
We test drove most of them (except the minivans). All are very nice cars. All Subaru's are all wheel drive (AWD), which has poorer fuel economy. Furthermore, stability control, a feature important to have with AWD cars, was only available on the turbo engine models.

New cars lose a lot of value when you drive them off the lot. So we decided to look for a nice used car. We priced them out in a spreadsheet with information from Kelley Blue Book. The price varies a lot when you consider buying a used car: mileage, engine differences, different luxury models, etc. Take a look at the spreadsheet below to give you an idea how much the price drops.

Carfacts helped us screen for a good used one and avoid the ones used as a rental car, the ones which changed hands a lot or were imported from the East coast.

A negotiating tip from a friend helped us close a good deal: think of the price as all-included: i.e. if the price is $25,000, make that the price you want to drive the car off the lot, including the 8.25% sales tax, registration and other fees.

Here is our new used, 21-28MPG, 5-star safety rated, curtain air-bagged Volvo V70:


Monday, December 18, 2006

Tax Carnival

... My tax advisor is the Wall Street Journal, blogs, Kiplinger and other magazines.
But where do you find all the personal finance blogs discussing tax issues? Just wait till the
Tax Carnival comes to town.


Saturday, December 16, 2006

Tax Advise

Consult with your lawyer. Consult with your tax consultant. Consult with your insurance broker. So often, the radio experts or brokerage advisers punt the ball. I have no lawyer, no insurance broker and no tax consultant, although consulting with a CPA is becoming more likely. My tax advisor is the Wall Street Journal, blogs, Kiplinger and other magazines. Here's a short list of gathered tax advise.

General tax Advise:

  1. Do not purchase mutual funds near the end of the year. Around the end of each year, many funds distribute capital gains to investors. Consider waiting until after the date to qualify for the payout to invest in that fund.
  2. Donate stock to charities, as opposed to selling and taking the capital gains tax. It is a double whammy: a) you do not have to pay the capital gain tax b) you get to deduct the contribution.
  3. Be green - get green: energy tax incentives
  4. Visit your doctors and dentists in October. This allows you plan better your health care expenses, and thus your health case spending account contributions for the next year.
Alternative Minimum Tax (AMT) related tax advise:
  1. Do not prepay state and local taxes if you suspect you are subject to AMT.
  2. Invest in AMT-free funds, which invest between 80-100% in municipals bonds and money-market instruments whose income isn't subject to the AMT.
  3. Defer income to next year.
Retirement related tax advise:
  1. If you've previously shunned IRAs, the best move you can make between now and 2010 is to invest as much as possible in a Traditional IRA. Then, in just over three years, you'll have a nice sum you can convert to a Roth IRA, because of changes in the tax law. This past spring, Congress passed a new law that will make it possible for everyone -- regardless of income -- to convert their IRAs into a Roth IRA beginning in 2010. (see Suze Orman column)
  2. Avoid ADR (American depositary receipt) in your IRA as they are subject to foreign tax which you can not recoup.
More to come.


Sunday, November 26, 2006

Pinger and Free International Calls!

I've been experimenting with Pinger the last month. It is a service which allows you to record a message from your phone, to be sent as an mp3.

This is great when you know somebody is in a meeting. Or when you have only a couple of minutes to spare and you don't want to be locked in a long conversation. Think of it like recording memo's.

I discovered the service via TechnCrunch. There is also a short description in a recent technology article from David Pogue in the Wall Street Journal:

FREE ‘PINGS’ Pinger is a new way to reach someone: a method that combines the immediacy of a text message with the personality of voice mail. (You can sign up at You call one of Pinger’s access numbers, say the name of the person you’re calling, and then speak a message.

Suppose you’ve just pinged your sister. She receives a text message to let her know. With one keystroke, she can hear your message — and with another, send a voice reply. There’s no waiting to roll over to voice mail, no listening to instructions, no outbound greetings.
But there is something even more interesting in his article: FREE INTERNATIONAL CALLS. That's right! (I haven't tried this yet, until tomorrow that is.)
You can now call any of 50 countries from the United States, free. Talk as long as you like. You pay only for a call to the access number in Iowa, which is 712-858-8883; if you use your cellphone on nights or weekends, even that’s a free call.

There’s no contract, no ads, nothing to sign up for. At the prompt, press 1 for English. Then punch in 011, the country code and the phone number. The call rings through immediately.

Fine print: In some countries, you can reach only landlines, not cellphones. And in part because FuturePhone’s lines have been flooded, its success at placing calls is not, ahem, 100 percent.

But it’s hard to argue with “free,” which, according to the company, it will be until at least 2010.

Tuesday, November 07, 2006

PG&E: Heat Storm Credit

Fall has been very mild in Northern California. Yesterday the temperature was still 76F/25C. We barely had to turn on the heater in the morning. Our electricity and gas bills have been low. The Oct 15-Nov 15 bill was a grand total of $39. Something struck me as odd on the statement: the bill included a Heat Storm Bill credit of $4.35. PG&E 's website has more details:

PG&E is giving customers a credit. As we all know, California experienced unusually high temperatures in late July 2006. Higher temperatures led to higher energy usage and that, unfortunately, led to higher energy bills. Because of this unprecedented situation and because of our broader commitment to serving our customers, we’re taking unprecedented action. We are retroactively lowering your July bill. In October all residential customers will see a 15 percent credit based on their electric energy usage in July.
Let me repeat the PR-machine-at-work "Because of this unprecedented situation and because of our broader commitment to serving our customers, we’re taking unprecedented action."

When a big corporation is handing out cash, count your chickens!


Sunday, October 15, 2006

Here's my password

Young and Broke had a nice post about My Grocery deals. Since I was about to post about our grocery shopping, my interest peaked. I checked out the recommended website : MyGroceryDeals and signed up.

What's up with websites who claim to take your privacy serious and supposed to be secure websites?

Dear Visitor to our wonderful website/Valued internet user -
We take your privacy serious ... blah blah blah.
We are a secure website ... blah blah blah.
So why do you send me my password in clear text when I changed it to a more secure one? To add insult to injury, the useful part of the website, requires you to install software to merely print a coupon.
The Coupon Printer contains security features needed to provide you with coupons you can use in a store. It does not install any third-party software, nor does it collect any personal information.
MyGroceryDeals is a great idea, but a poor implementation. No thank you!

Friday, October 13, 2006

Invest in what you buy

Recently (August 12th), I read an article in Barron's about Whole Food markets. WFMI had reported good earnings the previous quarter, which were however below the high (inflated) expectations of some analytics. As a result the stock had been oversold. The article discussed how Whole Food markets was a great company, with innovative ideas to increase sales/sq ft, with quality products and a high level of customer satisfaction. In other words, a great company to invest in. The low stock price made it a great buy.

I was ready to invest, but realized that the Barron's effect [1] might kick in Monday morning. Indeed, Monday it jumped +7.5%, Tuesday, +5% and the stock quickly became no longer undervalued.

The bigger story here is to look for investments among the quality products your buy. It is much harder to hope for great earnings from companies selling poor quality products. Instead, if you focus on companies you love because of their great quality, or good customer services, you already have a shortlist of companies to investigate and find a few undervalued ones.

I decided to create a short list of my best price quality buys:

And a short list of stores and service companies for their great customer service and quality offering:

Sunday, October 08, 2006

Financial Records

Fidelity recently had an interesting piece (both in podcast form, as in the On Track flyer) about financial records to keep and for how long. Some of the key points:

  • Keep tax records (W2 forms, canceled checks for deductible items, 1099 forms etc) for 7 years. (Three years for regular audits, but it's better to be on the save side.)
  • Keep investment records until you sell the security, plus seven years.
  • Keep retirement records forever.
  • Keep home improvement records until you sell your house, plus seven years
  • Keep bank statements seven years (to support your tax records)
  • Keep personal bills until you have proof of payment
A few weeks ago, I finished my paperwork clean up into nice Ikea hard carton boxes. I sorted them per year and fit about 2 years worth of paper trail in one Ikea box. My record keeping is pretty much on par with what Fidelity has been recommending.

In addition, I keep electronic copies of my statements and bils on a external hard drive and on a CD-RW.

Sunday, October 01, 2006

[List] Consumer related websites

I find myself keeping track of a great number of lists. Many different to-do lists (work, money, garden, home improvements, etc, trip lists, bookmarks, addressbook, etc. I recently started moving many of them onto "the network". That way, I can access them from anywhere and any computer. I put my lists either in Google Notebook, or Google Docs & Spreadsheet. My bookmarks, I moved to (I created a money tag and personal finance tag). Here is a short list of interesting consumer related websites I recently added to my bookmarks.